Presented by Robert LongfieldJuly 14, 2010

Investing in Infrastructure

Disclaimer• This presentation has been prepared from sources and data believed to be

reliable; however, no representations are made as to the accuracy or completeness thereof. Consulting Services Group, LLC is not responsible for errors and omissions in any of the information in the presentation obtained from external sources.

• The strategies displayed in this presentation are non-traditional approaches to investing and may contain a great deal of risk.

• Past performance is not indicative of future success.

• This presentation is neither an offer to sell nor a solicitation to invest in any security or investment fund as any decision to invest should be made only after a careful review of the current offering memorandum of the relevant security or investment fund.

Why Consider Alternatives

Source: Barron’s

Alternative Asset Classes Private Equity

Hedge Funds

Commodities

Private Real Estate

Private Infrastructure

Timber

Distressed Debt

Characteristics

Private Infrastructure Investing

What is Infrastructure?

Essential facilities and services, upon which the economic productivity of a community depends

Assets involved in the movement of goods, people, water and energy

Transportation AssetsTransportation Assets Communications AssetsCommunications Assets Regulated AssetsRegulated Assets Social InfrastructureSocial Infrastructure

Bridges and tunnels Radio/TV broadcast towers Electricity transmission Schools

Toll roads Wireless towers Oil and gas pipelines Hospitals

Railroads Cable systems Electricity and gas distribution Prisons

Rapid transit links Satellite networks Water distribution Courthouses

Airports, Seaports Waste water collection and processing systems

Infrastructure Defined

Strong Need for Capital InvestmentCharacteristics

The 30 member countries of the OECD are expected to spend in excess of $500-600 billion annually on electricity, road, rail and water infrastructure over the next 25 years1

Power-sector infrastructure improvements in OECD countries will require almost $4 trillion over the next 30 years2

If population and mobility trends continue for the next 30 years, the U.S. and Europe must at least triple their transportation infrastructure to meet congestion levels of the 1970s3

500 million gallons of water was leaking daily from old and rotted pipes during London’s 2006 drought4

50 million people lost power, 4 million people lost water, many railroads and airports were shut down after the 2003 Northeast U.S. power outage caused by aging transmission lines5

Over the next 25 years, modernizing and expanding water, electricity and transportation systems in the U.S., Canada and Western Europe alone will require approximately $16 trillion6

The American Society of Civil Engineers annual report card gave failing grades for U.S. airports, energy, and roads7

$9.4 billion per year for 20 years is required to eliminate bridge deficiencies

$11 billion annual shortfall to replace aging water facilities, comply with water safety regulations

1 OECD Study 2006. 2,4,5,6 Booz Allen Hamilton, Strategy + Business, issue 46, Spring 2007. 3 The Boston Consulting Group, “The China Rip Tide: Threat or Opportunity: Profiting from the Growing Supply-Chain Bottleneck”, June 2006. 7 American Society of Civil Engineers, Report Card for America’s Infrastructure, 2005.

Predictable Cash FlowPredictable Cash Flow

DiversificationDiversification

Return ProfileReturn Profile

Leverage and LiquidityLeverage and Liquidity

Portfolio ManagementPortfolio Management

Long-term assets with low risk of obsolescence Frequently have relatively low operating risk and operating costs Inelastic user demand

Infrastructure is a real return asset, comparable to real estate Low correlation of returns to equity and fixed income Diversification relative to real estate, timber, commodities

Typically have stable returns and potential for growing cash flow Majority of return from cash yield, with opportunity for modest

capital appreciation Premium returns may be available to early investors

Debt ranges from 50% to 85% of total capital Secondary market exists but less liquid than real estate Liquidity trade-off: cash flow profile vs. capital appreciation

Attractive alternative to long-term fixed income Favorable risk-adjusted returns relative to equity Inflation-protection, demographic-hedging characteristics

Characteristics of Core Plus Infrastructure Investments

Common Traits of Various Sub-sectors Monopoly

Inelastic Demand

Stable Cash Returns

Long Duration

Inflation Hedge

Hybrid Asset

Characteristics

Risk SpectrumCharacteristics

Core and Core Plus Value-Added OpportunisticBridges, tunnels, toll roads Airports, seaports Development projects

Pipelines, energy transmission Rail links Satellite networksand distribution

Contracted power generation Merchant power generation

Water and waste-water systems Rapid rail transit Non-OECD country infrastructure

Less riskLess returnLess riskLess return

More riskMore returnMore riskMore return

Source: JPMorgan Asset Management

Comparison of a fixed bond coupon and concession project cash flows

A coupon for a fixed rate bond is constant, without inflation-protection characteristics Cash flows for an infrastructure concession, however, are not fixed and rise through a combination of increased

usage and adjustment for inflation

Years

9

11

1315

17

1921

23

2527

$29

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Toll / rate increases = 2% p.a.Traffic / population growth = 1.5% p.a.Bond coupon

*Note: assumes principal of $100. This illustration is meant to show nominal cash flow over a 30-year period, and does not take into account the principal repayment of the bond in year 30. The chart also does not take into account the assumed zero residual value of the infrastructure concession.

*

Inflation Protection

Source: JPMorgan Asset Management

Interest Rate Hedge We have compared changes in the value of infrastructure assets to the value of a long-term fixed-rate bond in

response to changes in interest rates a 30-yr bond shows duration of approximately 15, i.e., a 1% change in yield will result in a 15% change in price

Contrary to a fixed coupon bond, infrastructure assets with cash flows that adjust for inflation will have a duration approaching zero or even negative duration, allowing them to maintain (or increase in) value

Factors other than interest rate changes influence the value of infrastructure investments

Interest rate change

Price indexImpact of changes in interest rates on valuation

Unique risks (and mitigating factors) Regulatory risk (due diligence and transparent regulatory process)

Political risk (non-monopoly assets, labor support, enforceable contracts, commercial law)

Liability issues (insurance and appropriate risk allocation among stakeholders)

Legal

Leverage

Liquidity

Varying sub-sector risks along a spectrum from operating toll roads, water/gas distribution,

airports through to development (similar to real estate)

Construction Risks

An emerging investment strategy: inefficiencies, lacking robust data

Risks

Due Diligence ProcessCharacteristics

Coming to Market

~3 - 5 Funds

Criteria IdentifiedCharacteristics

Team Individual ExperienceTeam ExperienceInvestment CommitteeOther Advisors/Consultants

•StrategyAsset Allocation

oGeography/RegionoSectoroLife Cycle StageoCurrency

Sources of ReturnLimitations

•Investment ProcessSourcing Investments

oPipeline – Who & how comp.?oValuation Process

Due DiligenceoBrief Overview & typical timelineoWho is involved in this process?

Investment Decision oWho & How?

Asset ManagementCapital Structuring/Restructuring

oHow & Where (Capital Markets)Potential Exit StrategiesIs there a track record?

Risk ManagementoConflicts of InterestoMitigation ToolsoPoliticaloOperationaloCorporate & Fund GovernanceoConstruction & Development

•Fund Structure/TermsTarget SizeOpen vs. ClosedLeverage# of investmentsTarget IRRTerm/Fund Life (Extensions)Fees (Mgmt/Carried/acquisition/etc)

•Firm ProfileAUMHistory

•Other Important CriteriaCoinvestment opportunities Investor ReportingAsset/Case Study (Accepted & Declined)Unique Risks & Competitive AdvantagesLegal & Audit

Consulting Services Group, LLCRobert A. Longfield, Jr., CFA

– Robert is a principal in the firm and has been employed at CSG since 1989. He in a senior institutional consultant and is the chairman of the firm’s Research Advisory Board.

Consulting Services Group, LLC– The founding principals of CSG have been together since 1988

and CSG itself was formed in 1990. The firm consults to over 65 clients representing $21 billion in assets across the country with 48 employees. In addition to large institutional retirement plans, endowments, and foundations; they assist clients with insurance reserves, hospital operating assets, and investment product design for financial institutions.

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